GOLD BREAKS ITS SUMMER LOWS AS COMMODITY PRICES CONTINUE TO FALL -- CRB INDEX HITS NEW 2006 LOW -- THAT MAY BE GOOD NEWS ON INFLATION BUT HINTS AT ECONOMIC SLOWING
GOLD TUMBLES BELOW SUMMER LOW... Gold and silver have succumbed to selling pressure that has weighed on most commodity markets over the last month. With energy prices falling, and the CRB Index having broken its summer low, the entire commmodity price structure is crumbling. I thought that a weaker dollar might insulate precious metals from the commodity slide. A recent bounce in the dollar, however, has prevented that from happening. Last Thursday, I wrote about the likelihood that gold would move down to test its summer lows. Chart 1 shows the Gold ETF (GLD) having broken that support level on rising volume. Chart 2 shows Silver iShares (SLV) falling on heavier volume as well. That turns their short- and intermediate-term trends lower and is causing heaving selling in precious metal stocks. Chart 3 shows the PHLX Gold & Silver (XAU) Index also falling beneath its summer low and its 200-day moving average. It's relative strength line is falling as well which confirms that the XAU is starting to underperform the S&P 500. That means it's showing losses on both an absolute and a relative basis. Precious metals aren't the only commodity stocks under pressure today. Basic materials and energy stocks are also showing heavy losses.
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EN ERGY STOCKS TUMBLE ... Energy stocks continue to fall under the weight of falling energy prices. Crude oil fell another dollar today and reached the low level of $65 for the first time in five months. The Energy Sector SPDR (XLE) broke its 50-day moving average a couple of weeks ago which was an early sign of weakness. Today, it's fallen below its 200-day moving average and on rising volume. Oil Service Holders, which have been the weakest part of the oil patch, have fallen to a new 2006 low (Chart 5). Judging from their falling relative strength lines, it seems clear that investors have been losing their taste for the energy sector.
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BASIC MATERIALS BREAK 200-DAY LINE ... Chart 6 shows the Materials SPDR (XLB) falling below their 200-day line today on rising volume. Selling in this group isn't exactly new. The XLB peaked in early May and regained only half of its May/June losses before rolling over again. Its relative strength line peaked in May and is close to a new 2006 low. I see their recent drop as carrying two messages. One is that the economy is weakening. That's because basic material stocks are cyclical in nature and are rise and fall with the business cycle. Some of the biggest losers in the XLB are in the copper and steel groups. Chart 7 shows Phelps Dodge (copper) forming a potential double top below its may peak. Chart 8 shows Nucor (steel) threatening its 200-day average. Since those stocks are tied to their respective commodities, their weakness also suggests that commodity prices are peaking.
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CRB INDEX TOUCHES NEW 2006 LOW... The recent drop by the Reuters/Jefferies CRB Index fall beneath its June low (near 329) signalled a commodity top. Apparently, that view is taking hold with traders and investors. The CRB has fallen another six points today and has fallen below its March low (316) to reach the lowest level of the year (red arrow). The tide has turned against commodities and assets tied to them. The monthly chart shows that the five-year commodity uptrend is weakening. The blue circle in Chart 10 shows the CRB breaking the 20-month moving average for the first time in four years. The monthly MACD histogram bars have fallen below zero (a sell signal) for the first time since early 2002. That suggests that recent commodity selling is more than just a short-term pullback. While falling commodity prices provide good news on the inflation front, it also hints at a slowing global economy. That's not necessarily good for global stock markets, especially those tied to raw materials like Australia, Canada, and emerging markets like Latin America.
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